TEST PAPER 3

1. WHY IS THE AGE OF THE VESSEL AN IMPORTANT FACTOR IN SUPPLY OF SHIPS?

Ans. The average lifespan of a ship is 25-30 years. After this span, the ship may become too
expensive to operate, but most importantly, to become unseaworthy putting human safety at risk.

Higher age would reflect higher operating costs, limitation in operating the vessel in some ports
where older vessels are not allowed etc. Similarly older bigger vessels also have bige=ger pollution
liability and may lead to bigger claims.

Shipping Market or Charterers shall always prefer Newer efficient vessels than older expensive
vessels which leads to lesser business opportunities for the owners.

Some ports around the world may not have the prospects of handling older vessels as they may be
designed for newer vessels which shall limit the transportation, the main purpose of the vessel.

2. DESCRIBE DISECONOMIES OF SCALE.

Ans. Economies of Scale with reference to shipping can be defined as below:

As the size of ship increases, other things being equal cost for transportation one ton of cargo
reduces. The cost per ton mile also reduces.

Advantages of Economies of Scale:

1. Less crew costs

2. Reduced bunker costs
3. Comparatively lesser freight rates
4. Provides different employment opportunities in different areas.
5. Faster reach of goods and services for customers.

Diseconomies of Scale could be explained as points against this theory which majorly focuses on
limits, time and other costs incurred during the scale:

Points include

a. Limitation of maket is not considered, as there is a definite relation in demand and capacity.
b. Time in port always play a vital role in finalizing total costs incurred and other unavoidable
factors like labour problems and breakdown effects the time in ports.
c. Insurance costs tend to go up for larger ships because of high ship costs, higher possibility of
claims in case of accidents etc.

3. WHAT IS IMPORTANCE OF COASTAL SHIPPING:

Ans. The primary advantages of coastal shipping are huge cost savings to the shipper and
government, reduction of road traffic congestion and decrease in air pollution. Transportation of
goods by coastal vessel is far more efficient and cost-effective than road transport and is much less
prone to theft and damage. Coastal shipping is ideal for transportation of Containers, Project
Cargoes, Over Dimensional Cargoes, RORO cargoes such as cars, trucks, semi-trailer trucks, trailers,
and railroad cars, Dry Bulk Cargoes like grain, fertilizers, steel, coal, salt, stone, scrap and minerals
and Liquid Bulk Cargoes like oil products (such as petrol, diesel oil, kerosene, aviation spirit).

Coastal Shipping also helps in extending the resource base of the country by enabling the harnessing
of the wealth of the adjoining seawaters. Coastal Shipping Industry also supports ship-building, ship-
breaking, ship-repairs and other ancillary industries and business. Shipping, therefore, generates
employment both directly as well as through a number of ancillary activities. Most of these
industries are labour intensive and are, thus, especially relevant for India.

Major advantages of Coastal Shipping are mentioned as follows:

1. Affordable/cost efficient mode of transportation which is advantageous majorly for bulkier

or high quantity goods.
2. Increases employment opportunities as there shall be necessity in manpower in all sectors.
3. Overall economic growth in India which shall develop India.
4. Lesser pollution compared to road, rails and flights as it shall carry more commodities than
all combined.
5. Goods/commodities shall be safer when transported by vessels as every detail shall be
mentioned under documents to avoid thefts/frauds.

4. LIST CARGO RELATED COSTS INCURRED IN SHIPPING.

Ans: Common Cargo related costs incurred in shipping are mentioned as follows:

• Freight Shipping Costs

These costs include transportation of goods from one business to another which includes land,
air and shipping transport costs to be delivered at designated port. Eg. Vessel is calling at
Houston and goods/cargo/freight is at Beaumont and New Orleans the transportation costs
incurred to deliver at Houston shall be considered as Freight Shipping Costs

• Cargo Insurance

Every cargo has insurance to be claimed before transporting by a vessel due to quantity and quality
matters

• Pickup Fee

These costs include all the operation costs rendered at Loading or discharging ports and distance
covered from Port of Departure to Port of Arrival.

• Peak Season Surcharge

The Peak Season Surcharge is a cost charged by the carrier for cargo moved during a certain period
of the year, which is considered peak season.

• Emergency Risk Surcharge

This freight shipping cost can be paid to the carrier to cover for extra precautions whenever piracy or
different acts of war can threaten your cargo.

• Terminal Handling Charge

It is charged by the terminal providers of the port of origin as well as the destination port, for loading
and discharging cargo from the ship.
 • Bunker Adjustment Factor

This cost is charged by the carrier, and it covers the fuel used by the ship that transports cargo from
one port to another. This fee is generally the same, no matter which carrier you choose to do
business with.

• Customs Duty

Customs Duty, also called Customs Tax, is a fee that can apply to certain types of goods. It must be
paid to customs when the cargo reaches its destination.

• Delivery Fee

The Delivery Fee, similar to the Pickup Fee, is a fee charged by the freight forwarder. It covers
transportation of cargo from a warehouse located at the destination terminal, to the final delivery
point.

• Currency Adjustment Factor

This additional freight shipping cost is charged by the carrier, to cover the exchange losses that occur
whenever they need to convert their costs and revenues from different currencies into US Dollar.

6. WHAT DO YOU UNDERSTAND BY CABOTAGE?

Ans. Cabotage is the transport of goods or passengers between two places in the same country. It
originally applied to shipping along coastal routes, port to port, but now applies to aviation, railways,
and road transport as well.

Cabotage rights are the right of a company from one country to trade in another country. In aviation,
it is the right to operate within the domestic borders of another country.

Cabotage laws apply to merchant ships in most countries that have a coastline so as to protect the
domestic shipping industry from foreign competition, preserve domestically owned shipping
infrastructure for national security purposes, and ensure safety in congested territorial waters.

India’s shipping industry is a necessary and vital component of its economy, playing an indispensable
role in the country’s trade and commerce. As per the Ministry of Shipping, 95% of India’s trading by
volume and 70% by value is moved by maritime transport. The industry acts as a primary mode of
transport internationally of various essential commodities.

The shipping industry is handled by the Ministry of Shipping which is the apex body for formulation
and administration of the rules and regulations related to shipping. It was formed in 2009 by
bifurcating the erstwhile Ministry of Shipping, Road Transport and Highways into two independent
bodies.
6. WHAT ARE THE STATUTORY REQUIREMNETS FOR THE INCORPORTATION OF A COMPANY?

Ans: The incorporation of a corporation refers to the legal method that's accustomed to typing a
company entity or a corporation. These firms will be known with terms like ‘Inc’ or ‘Limited’ in their
names.

Below mentioned are the statutory requirements for Incorporation of a company:

a. Ascertaining Handiness of Name

The first step within the incorporation of an Associate in the company is to decide on an applicable
name. A corporation is known through the name it registers.

b. Preparation of Memo of Association and Articles of Association

The memo states the sphere during which the corporate can do business, objectives of the
corporate, yet because of the style of business the corporate plans to undertake.

c. Printing, Linguistic Communication, and Stamping, Vetting of Memo and Articles

d. Power of Attorney

To fulfill the legal and complicated documentation formalities of incorporation of a corporation, the
promoter could then use an Associate in a professional who can have the authority to act on behalf
of the corporate and its promoters.

e. Statutory Declaration

This declaration, moreover states that ‘All the necessities of the businesses Act and therefore the
rules under that are compiled with respect of and matters precedent and incidental to that.

f. Certificate of Incorporation

If the Registrar is totally glad that each one’s needs are consummated by the corporate that's being
incorporated, then he can register the corporate and issue a certificate of incorporation.

g. Payment of Registration Fees

A prescribed fee is to be paid to the Registrar of corporations throughout incorporation. It depends

on the nominal capital of the businesses that even have share capital.

h. Certificate of Incorporation of the Company

After the higher than documents filed with the Registrar and therefore the prescribed fees paid, the
Registrar can then issue a certificate referred to as Certificate of Incorporation and enter the name
of the corporate within the Register unbroken in his workplace.

7. DIFFERENTIATE BETWEEN FAS AND FOB

FAS – FREE ALONGSIDE SHIP

a. FAS refers to the risk of transporting the product when the cargo is on board the ship.
b. In this case, it is up to the buyer to decide how long the transport risk will be adjusted.
c. This incoterm is beneficial to seller.
d. For FAS the seller only has to place the cargo next to the ship to send the cargo to the buyer.
 e. In this case, the choice of the transport ship and the type of cargo is the responsibility of the
buyer, and in this case, controls from the beginning of shipping to the destination.

FOB – FREE ON BORAD

a. FOB refers defines all cargo liability starts from the time that loads on the ship.
b. In this case, the delivery time of the product to the ship was very important for the seller
because at this time all the responsibility of the cargo is with the seller.
c. This incoterm in beneficial for buyer.
d. The shipping structure and the transport risk of loading and choosing the type of cargo ship
and even the method of transportation are the responsibility of the seller.
e. In this case, even customs and freight costs calculate in advance, so the buyer can be safe in
terms of additional costs.

8. DESCRIBE DIFFERENT TYPES OF PORT ADMINISTRATION.

Ans. There are majorly 4 types of Port Administrations which are mentioned as follows:

A. CENTRAL GOVERNMENT OR NATIONAL PORT AUTHORITY:

These types of ports are majorly handled by central government, usually Ministry of Transport and
Communication. There are no direct representatives of control. Budget, tariffs etc are approved by
central government. Funded through government

B. AUTONOMOUS PORT AUTHORITIES:

These types of ports are publicly accountable. Fully controlled by elected board of members. Legally
free from governmental control. Generally no-profits are made. Funding majorly done via.
Borrowing, public financing etc.

C. REGIONAL OR MUNICIPAL PORT AUTHORITY:

Controlled by State/Regional Government. It subjects to local or regional political policies. Operated

with regional or local planning. Comparatively less or no profit making. Obtains funds via. Public
offerings.

D. PRIVATE PORT ORGANIZATIONS:

Controlled and funded by private sectors. Majorly profit making. Commercial type of Management.
Fully operates as a dependent division or independent unit of private enterprises.

TEST PAPER 1

1. WHAT INFLUENCE DOES THE AGE OF VESSEL ON THE SHIPS IN MARKET AND WHY?

Ans. a. Suply chains are already strained due to surge in demand as economy rebounds from
lockdown.

b. The age of vessel signifies the useful availability of the fleet. Many countries have imposed
restrictions on entry of older ships in their ports. This means the availability of ships gets affected.
c. As referred above, the age profile of the fleet is growing and many of these vessels are built more
than years back may go to scrap yard.

d. Supply is also affected by tge operation of aging vessel as no of vessels which are laid up are either
having major repairs or has slower speed.

e. Supply gets older and slower as emission occurs. Age of vessels has significant possibities of
breakdowns resulting to casualties. So with the awareness of quality in shipping and importance of
the preservation of the marine enviornment people have made port states very active in controlling
the entry of ships in their waters.

2. WHY SHOULD A STATE HAVE A POLICY FOR SHIPPING?

Ans. A policy is defined as a cause of action adopted for the sale of expidency to achieve a certain
goal. However in shipping, a policy is required so that the nations interest related to shipping can be
protected. These interests would include employment in shipping, foreign currency exchange,
investments, cargo movements, ports and other related infrastructural auxiliary industries etc.

Shipping is a very impportant link in the chain of international trade. Therefore, the shipping policy
forms a part of the economic strategy of a country. The policy is also developed and stated keeping
in mind the protection and assistance which may be made available to the merchant fleet , thereby
enabling it to grow and become prosperous.

3. DISCUSS THE FACTORS INFLUENCING THE MANNING COSTS OF A VESSEL.

Ans. The manning cost is an important component of the ship’s operating costs and is grouped in the
vessel related costs. The manning costs include the wages paid to the fleet personnel, their
miscellaneous charges and their travel costs for joining or leaving the vessel.

Factors influencing the manning costs are mentioned as follows:

A. The people included in ruuning the vessel. Groups are mentioned as follows:

- Vessel Master/Captain

- Deck Department: Consisting of Chief Officers and subordinating officers along with cadets under
the department.

- Engine Department: Consisting of Chief Engineer and subordinating officers along with cadets
under the department.

- Radio Officers- For communication.

- Saloon department: Consiting of supporting members majorly cooks, stewards security etc.

The Nos. and positions shall mainly depend on the flag state requirements, type of vessel, degree of
automation, nationality of the crew etc.

B. Type and size of the vessel:

Certain ships require more and specialized category of personnel. Which may increase or decrease
the no of individuals and officers running under a vessel.

4. DESCRIBE DIFFERENCE BETWEEN VOYAGE AND VESSEL RELATED COSTS:

Ans. Voyages Costs depend on the voyage pattern of the ships

Factors include:

1. Bunkers: The fuel costs is a major component of the cost structure as this keeps fluctuating down
the line. The fuel costs depend on the area where bunkers are taken, power of engines, size of
vessel, length of voyage and oil preference type.

2. Port Charges: Port authority puts various charges when a ship is in the territory which includes
pilot charges, light dues, wharf or any service charges provided dependning on size of vessel, cargo
carried, location of berth.

3. Canal dues: These are charges paid to the canal authorities while crossing Suez, Panama, Kiel or
any other Canals depending on size and type of vessel, cargo, quantity, speed etc.

Vessel related costs are costs incurred for the ship.

Factors include:

1. Manning Costs: These are costs of the crew which includes wheir wages, provisions, travel costs
while embarking or disembarking. Head count based on Size and type of vessel , flag state
requirements etc.

2. Repair and Maintenance Cost: Include appointment time services, repairs buying new parts etc.

3. Survey costs: It is obligatory to keep the vessel maintainedd to set standards and requires various
surveys and inspection by the classification society, flag state etc.

4. Stores and Spares: Spare parts change during voyages which also includes minute changes for the
vessel and included in the cost. Stores majorly includes Provisions and other charges for the vessel.

5. Insurance costs: Insurance costs includes Vessel insurance and Cargo insurance which is loaded
and unloaded for the voyage.

6. Vessel Capital Costs: Includes interest on capital depricitation etc.

4. WHAT DO YOU UNDERSTAND BY ECONOMIES OF SCALE?

Ans. These are various cost cutting efficiencies that are brought about as the scale of operation
grows, e.g. specialization of workers i.e. when labour specializes in a particular field or type of work
their output is better, more accurate and fast.

Economies of Scale with respect to shipping can be defined as “As the size of ship increases, other
things being equal, cost for transporting one ton of cargo reduces. The cost per ton mile also
reduces.”
Benefits of Economies of Scale are mentioned as follows:

a. Less crew costs: as larger ships do not need very large crew in relative comparison to smaller
ships. This benefit is especially important as crew costs form about 15 to 20% of shipowner’s total
costs.

b. Reduced fuel costs: as the larger ships consume comparatively less fuel per cargo ton mile. This is
the major development, which has resulted in large fast container ships and slow VLCC/ULCCs.

c. Reduced freight rates as more cargo is carried at a time and the cost per ton mile is reduced. This
leads to improvement in overall trade.

d. Due to faster and prompt container vessels the frequency of sailings are reduced and thereby
goods are reaching the consumers more quickly than before.

e. Bigger ships have led to tremendous development of ports and their hinterland. Larger terminals
have developed with better cargo handling facilities.

5. WHAT IS ROLE OF SHIPPING IN INTERNATIONAL TRADE?

Ans. The market of shipping services can influence trade flows, the products that countries sell and
how price shocks vertebrate through trade.

Ships transports more than 80% of world trade volume and about 70% of trade value. The world
fleet that carries seaborne trade involves dry bulk ships, oil tankers and containerships operate on
flexible routes.

Shipping transport companies influence transport costs and thus global imports and exports.World
trade in commodities is greatly imbalanced where most countries are either large net imports or
large net exporters.

The role of market for shipping services enables us to come up with new estimates of factors that
impact trade internationally. The transport sector for instance depends on the impact of a decline in
fuel costs on trade. This has both direct and indirect effect. Indirectly improves bargaing positions of
company since it nade travelling with cargo less costly.

7. WRITE SHORT NOTES ON FOB AND CIF-

FOB- FREE ON BOARD:

Responsibility is to place the goods on board the vessel att the port of shipment.To provide an
export lisence, pay export duties etc. To provide clean on board receipt. Pay loading costs of
customs not included in freight.

When goods are passed rail to vessel at the port of loading even through property has not passed.

Buyer nominated the carrier for the voyage as he pays unloading costs to an extent that they are not
included in freight.

CIF- Cost Insurance and Freight

Seller’s responsibility is to contract for the carriage. To deliver the good on board the vessel port
shipment is named. To pay export duty fees etc. Pay for loading/unloading costs. To furnish buyer an
invoice, B/L and cargo insurance policy. When goods are passed at the disposal of buyer, risk passes.
Arrange insurance and pays freight.

Buyer accepts delivery of goods upon shipment when invoice cargo insurance, policy certificate &
B/L are tendered to him. Pay unloading costs to the extent that they are not included in freight.
Payment of port charges, duty etc at Port of destination.

7. ANSWER PROBLEM “A” attached herewith:

Voyage Account:

FREIGHT= 28600000

ADD PRIMAGE= 1430000

(5% OF FREIGHT)

GROSS FREIGHT=30030000

LESS COMMISSION= 2145000

(7.5% OF FREIGHT)

NET FREIGHT= 27885000

CALCULATIONS:

23*186=4278 19*194=3686

19*192=3648 22*188=4136

24*185=4440 TOTAL=28600000

LESS DOE

PORT DUES= 525000

WAGES AND SALARIES= 6360000

FUEL= 3735000

STEVEDORING= 1270000

STORES= 1220000
[1340000 - 120000]

TOTAL = 13110000

GROSS OPERATING PROFIT(GDP)= NET PROFIT- DOE

= 14775000

LESS FIXED COSTS

DEPRICIATION

(90000000-180000)/9/2 = 5010000

INSURANCE- SHIP

(90000000+180000*5%)/2 = 2254500

INSURANCE- FREIGHT(FRT0

(15000000*5%)/2 = 375000

TOTAL= 7302000

GOP = 14775000

NOP= GOP - FIXED COSTS

= 14775000-7302000

NOP= 7473000

GOP=14775000

NOP=7473000